Jonathan Ames discusses the evolution of the legal market

Britain used to produce things – steel, coal, textiles, ships. Today that type of British heavy industry and manufacturing exists only in the history books. Today, Britain makes lawyers.

Legal profession representative bodies — if not able to counter the image of fat cat lawyers — are at least attempting to demonstrate that the portly pusses generate national wealth. The Law Society and Bar Council crow that lawyers rack up nearly £27 billion for the UK’s annual GDP, employ some 320,000 people in England alone and contribute about £3bn annually to Britain’s balance of trade.

Crucial to those numbers are the City of London’s band of big beast law firms. It is estimated that in 2012 legal services accounted for some £4bn of exports, with the vast majority of that coming from the Square Mile brigade. Whereas Britain used to dominate the waves with its White Ensign, today it sends forth fleets of lawyers to do battle in international commercial seas.

But are they winning?

US firms represent the main competition, and on a purely financial basis, it appears the Yanks are a nose ahead. The Lawyer magazine recently published figures showing profit per equity partner (PEP) at the big US players was marginally better than at the magic circle five and beyond.

Chicago-based Kirkland & Ellis leads with a global PEP figure for 2012-13 of £1.96 million, marginally higher than the English leaders, blue blood practice Slaughter and May, which clocked an estimated PEP figure of 1.9 million. The next three in the US table all outstrip the equivalent numbers of their English counterparts.

Having said that, there’s not that much in it between English and US law firms. Together they clearly dominate the international legal market, with a smattering of European and other actors also on the stage. Whether that dominance will continue is an issue on the minds of all global law firm managing partners.

Market consolidation is the recent trend in the wake of the global financial crisis. Without doubt, the move that shook the global legal sector last year was the merger struck between London’s SJ Berwin and Sino-Australian firm King & Wood Mallesons.

The deal was groundbreaking for two reasons. First it created a global practice with an estimated turnover of more than $1billion, lifting the merged firm into a club that is no more than 20 strong. Second, and more importantly, the merger shone a spotlight on the future influence on the global legal market of the Asia-Pacific region and China specifically.

Elsewhere among the world players, England’s Norton Rose merged at the beginning of last year with Houston-based Fulbright Jaworski to create a mega firm with annual turnover falling just short of $2 billion. And there have been other deals down the pecking order, not all born out of the positive flirtations between relative equals. High on the list was Penningtons’ rescue of Manches from administration last autumn.

Indeed, global law firms are well advised to approach merger with caution, as tying the knot is by no means a panacea to perceived or actual ills, or a magic pill that will double the fortunes of two ostensibly healthy firms. The name Dewey & LeBoeuf should ring loudly in the ears of all management teams winking at perspective partners. That firm spectacularly crashed and burned in the mid-2012, with many suggesting that poor due diligence prior to the 2007 merger between LeBoeuf Lamb Greene & MacRae and Dewey Ballantine was the root cause.

Why are law firms – even some of the biggest in the world – contemplating and actually merging in such numbers? There are several pressures squeezing profitability and other factors that mean law firms are thinking bigger is better.

In many ways, the global financial meltdown was good news for in-house counsel. If their businesses have survived, they are very much in the driving seat when it comes to fee negotiations for their panel law firms. Hourly billing in every practice area bar litigation is rapidly becoming a fond memory that only the most senior of senior partners will be able to recall.

Traditional law firm structures also face pressure from the gradually increasing use by clients of legal process – and in some cases, legal services – outsourcing. The traditional pyramid hierarchy of law firms – comprising a cadre of senior equity partners at the pinnacle supported by a wide base of salaried partners and associate worker bees – is seeing the ground erode beneath it.

Outsourcing involves sending the type of work that junior lawyers cut their teeth on farmed out to legal process assembly lines in India, the Philippines and elsewhere. If the work is drying up for the worker bees, where will the next generation of senior law firm partners come from?

Salaried and junior partnership status is also under threat after the UK taxman targeted LLPs to force them to pay national insurance for lawyers in those categories.

The advent of alternative businesses structures for English law firms will also have an impact. The leading global firms effectively ignored the legislation as it went through parliament, but now that the big four accountancy practices are interested – PwC bagged a licence at the beginning of the year, while Ernst & Young and KPMG are rumoured to be weighing up applications — they will have to think again.

‘Big Law’ is a horrible phrase, but it is entirely apposite for the global end of the profession in England. It is likely to remain big for some time yet, but not without facing some increasingly tough challenges from a market that is evolving faster than ever.